Article

February 9th, 2009

Good Bank, “Bad” Bank Debate

One solution to the banking crisis that is gaining currency is the idea of splitting banks into “good” banks and “bad” banks. To do this the United States government would buy all the toxic mortgage-backed assets and put them into nationalized “bad” banks so that the “good” banks don’t have to worry about those investments.

To explain this proposal Economics Correspondent Paul Solman first explains the concept of a bank using President Franklin Delano Roosevelt’s own words from his first fireside chat in 1933 during the Great Depression. Next, Solman looks at how this concept of “bad” banks worked during 1990 banking crisis in Sweden.

But is the United States ready to nationalize its banks? That’s another theme Paul explores.

Quotes

“The bank does not put the money into a safe deposit vault. It invests your money in many different forms of credit: in bonds, in commercial paper, in mortgages. The bank puts your money to work to keep the wheels of industry and of agriculture turning round.” – Franklin Delano Roosevelt, President of the United States

“You want to split the banks, put the toxic bad stuff in some entity — let’s call it the bad bank — and keep the good part of the business in the good bank. The good bank, you say, “Congratulations, you now run a bank without any of the toxic assets, without any of the holdover problems. Your job is to run this as a bank that makes money in a good, old-fashioned banking way.”” – Simon Johnson, Massachusetts Institute of Technology

“What Sweden did was, first, to make sure that they knew all the losses in the banks. And the second thing was to take out the bad debts from the normal banks and put them into bad debt banks. And then the good banks started giving loans again.” – Anders Aslund, Peterson Institute for International Economics

Warm Up Questions

1. What is the difference between a public and a private institution?

2. How does a bank work? How does it make money? What purpose do banks serve?

2. What is the relationship between the government and banks?

Discussion Questions

1. In your own words, what is a “bad” bank? How would you explain the concept to a 10-year-old? What metaphors would you use?

2. Why are Americans resistant to the idea of the government taking over a bank?

3. Paul Solman points out that Sweden is much smaller and more homogenous than the United States, how does that affect the debate?

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